Rockwood Strategic has continued to deliver double-digit returns

RKW has continued to deliver double-digit returns…by Ryan Lightfoot-Aminoff

Overview

 
Rockwood Strategic (RKW) has outperformed even its lofty 15% annualised goal over the long term as a result of manager Richard Staveley’s bottom-up process that has led to a highly concentrated portfolio of undervalued, micro-cap companies (see Performance). This concentration, typically between 20 and 25 holdings, will enable the manager to take sizeable stakes in his holdings, supporting his approach of collaborating with management teams to help instigate a turnaround.

This strong performance has contributed to the trust trading at a premium rating (see Discount). The board has sought to manage this premium by issuing shares to meet the investor demand. In turn, this has led to an increase in the size of the trust, as well as raising cash for Richard to further deploy into the portfolio. This has been put to work in four new stocks in the past year, as well as top-ups to some existing holdings that Richard has identified as good value with recovery potential.

Furthermore, the manager has trimmed back a couple of his best performers in order to manage position sizes and capture the sizeable profits made. He has also had a full realisation in Galliford Try. The stock has been held for c. three years and delivered a 2.4x return on investment over that period, after executing its turnaround strategy, with which Richard was engaged throughout (see Portfolio).

Analyst’s View

RKW has been one of the standout strategies in the investment trust sector over the past few years, largely as a result of the excellent Performance delivered by Richard’s focus on identifying idiosyncratic opportunities from the smallest and most overlooked micro-cap area of the UK market, and helping them deliver on their promises.

We believe the recent journey of Galliford Try encapsulates this approach in one stock. After initiating a position after a period of weakness, Richard identified early that new management had begun a turnaround of the business, which had considerable recovery potential and, alongside a number of engagement initiatives and a market capitalisation below stated net cash on the balance sheet, benefitted from a recovery in the share price, delivering a 2.4x return for the trust. Whilst this may seem like an oversimplification, in our view, it can be repeated, demonstrating the potential for future returns.

The proceeds from this realisation have been put to work in a number of new holdings in the past few months, demonstrating the opportunity set that still exists in micro-caps. One of these has already been the subject of a takeover approach. Whilst this has since fallen back, it is evidence that M&A is still a factor for the trust, a factor that has contributed significantly to returns over the past few years. We believe this potential adds further to the investment case and is one of several routes Richard can call on to make considerable profits on his investments and capitalise on the opportunity of the asset class.

Bull

• Excellent long-term returns through superior stock selection
• Asset class continues to provide ample opportunities
• Portfolio will be highly differentiated from peers and any passive investment

Bear

• Premium rating means the trust does not have the re-rating potential that many peers do
• Highly concentrated portfolio could be exposed to black swan events
• Despite the recent falls, charges remain above average for the peer group

See the full research on RKW here >

_Disclaimer

_{Disclosure – Non-Independent Marketing Communication
 
This is a non-independent marketing communication commissioned by Rockwood Strategic (RKW). The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.}